Book Review: Memoirs of an Unregulated Economist by George J. Stigler

Best-selling novels and popular movies never seem to have an economist as the hero. An archaeologist or an architect, an over-the-hill newspaper man, an inebriated detective—all seem to fit the bill. Even the book version of Death Wish has an accountant as the protagonist. But an economist? What can be exciting about supply and demand, the quantity theory Of money, or the intricacies of public utility regulation? A work of fiction, at least, can exaggerate the truth. But what can one look forward to from an economist’s autobiography? Economists are boring, fight? Wrong!

George Stigler is a leading member of the Chicago school of economics and the 1982 recipient of the Nobel Memorial Prize in Economic Science. His intellectual autobiography, Memoirs of an Unregulated Economist, proves that there is life after Econ 101 and that economics is far from being a dismal science.

In telling his own story, Professor Stigler does a masterful job of weaving in the history of 20th-century American economics. In the late 1940s, many economists and most intellectuals were convinced that large doses of social planning and government intervention were both desirable and the inevitable waves of the future—the only things that would save America from falling back into the abyss of the Great Depression of the 1930s. Forty years later it is socialism and interventionism that are on the defensive, with the market economy and individual liberty once again the rising ideals. To a great extent the radical shift in ideological direction has been due to the Chicago School, and this is the real story in Stigler’s book.

Stigler did his graduate work in economics at the University of Chicago in the 1930s. He studied with such leading figures as Frank Knight, Jacob Viner, and Henry Simons. Though they were far from being radical advocates of laissez-faire, in the collectivist environment of the New Deal in America and Fascism and Communism in Europe, these economists instilled in their students an appreciation of the price system and a competitive market order. And they warned of what collectivism could mean for the loss of political and civil liberties. Their teaching left its mark on Stigler and others like Milton Friedman. In the 1950s, these influences gelled into the “Chicago School.”

Stigler’s contributions have been in the area of micro-economics, i.e., the theory of markets and prices. He devoted his energy to the economics of information, the theory of monopoly, and the theory of government regulation. Economists have long worked with an economic model of “perfect competition” in which agents are assumed to possess full and perfect knowledge, and markets are assumed to adjust immediately to any and all changes. This model has been an easy target for critics of capitalism. Stigler demonstrated how markets enable individuals with less than perfect knowledge to search for information about the qualities of goods and the prices at which they may be obtained; he further showed how competitive forces tend to bring supplies and demands into balance through this information-search process.

He also challenged the long-held assumption among many economists that when markets are less than “perfect,” monopolistic forces tend to exist all over the economy, with consumer interests sacrificed for the benefit of a few, big, highly concentrated firms and industries• In a series of theoretical and empirical studies, Stigler was able to prove that as long as government doesn’t bestow privileges guaranteeing producers protection from competition, the market economy is an inherently rivalrous arena, and one that is very responsive to changing consumer demands.

Finally, Stigler pioneered research in the field of government regulatory policy. The standard view, again, was that certain industries are inherently uncompetitive; therefore, it was believed necessary for government to regulate their pricing and production policies for the public good. Stigler argued that rather than serving the public good, regulatory agencies invariably came under the control of the industries they were to regulate. All the economic incentives were for the regulated companies to devote time and resources to “capture” the agencies, and then use them to limit entry into their market and to set prices favorable to themselves. Stigler demonstrated that when left free from government oversight, these sectors of the economy were usually as open and competitive as any other.

The drama of the tale is in Stigler’s telling. He explains the different views and schools of thought; he introduces the reader to the competing personalities and their conflicts over a 50-year period; and most important, he escapes from the abstract language and arguments of the rarefied economics journals. Thus, the general reader can follow the intellectual odyssey in terms that flesh out the theoretical and policy debates of the past several decades. Stigler doesn’t limit himself to developments in his own fields of interest. He also describes the evolution of the Chicago School monetary tradition, beginning in the 1930s, through the writings of Milton Friedman, right up to the current theory of Rational Expectations. And he explains the Chicago School’s extension of the logic of economics to new areas such as the economics of crime, the family, and race relations.

As a member of a rival school in economics—the Austrian School—the present reviewer is tempted to raise a number of questions and objections to the approach of the Chicago School. While the Chicago economists have emphasized the vigor of competitive forces, they have failed to analyze to any real extent the focal point of that competitive process—the entrepreneur. While they have tried to develop a theory of informational search in the market, they have failed to grapple with the real problem of imperfect knowledge, i.e., how do market agents form expectational judgments when the uncertainty they face cannot be reduced to simple statistical probabilities? And finally, Stigler says that economics can be applied to a wide array of areas and problems because “Economics is the study of purposive behavior involving choice.” Yet, the frequent tendency by Chicago economists to reduce all economic phenomena to a purely quantitative dimension often has resulted in many essential human elements of “purposive behavior” being excluded from their analysis.

But these may be considered family squabbles among free market economists. George Stigler, and the Chicago School he has helped to create and nurture, have changed the shape of economics in the United States and increasingly around the world. The economic planners and interventionists are losing the intellectual battle everywhere, and a major portion of the credit belongs to the set of ideas so eloquently described in this book. Ted Turner may not buy the rights to turn it into a cable movie special, but it certainly is a story in which the economist is the hero.

THE FREEMAN

EMAIL UPDATES

* indicates required

Email Address *

CURRENT ISSUE

December 2014

Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.